If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Jiangsu Yanghe Brewery (SZSE:002304) looks attractive right now, so lets see what the trend of returns can tell us.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Jiangsu Yanghe Brewery, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = CN¥13b ÷ (CN¥64b - CN¥12b) (Based on the trailing twelve months to September 2023).
So, Jiangsu Yanghe Brewery has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Beverage industry average of 15%.
See our latest analysis for Jiangsu Yanghe Brewery
In the above chart we have measured Jiangsu Yanghe Brewery's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Jiangsu Yanghe Brewery here for free.
What The Trend Of ROCE Can Tell Us
It's hard not to be impressed by Jiangsu Yanghe Brewery's returns on capital. The company has consistently earned 25% for the last five years, and the capital employed within the business has risen 60% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Jiangsu Yanghe Brewery can keep this up, we'd be very optimistic about its future.
In Conclusion...
In short, we'd argue Jiangsu Yanghe Brewery has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Therefore it's no surprise that shareholders have earned a respectable 43% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.